Modelling the long-run demand for money in the United Kingdom: a random coefficient analysis

This paper investigates the issues of the predictability and the time-varyi ng behavior of the long-run demand for money over 1881-1995 using a random coefficient estimation procedure. This procedure allows the profile of the coefficients to be traced over time and relaxes four restrictions routinely made in applied work. The results indicate that whether the predictability of money demand has been fairly uniform over various decades (including th e first half of the 1990s) depends on the type of the specification of mone y-demand function used. The time-varying behavior of the short-term interes t rate argues against the existence of a liquidity trap during the 1930s. T he behavior of the long-rate elasticity provides a little bit of evidence i n support of a Liquidity trap with respect to that variable in the 1930s. ( C) 2001 Elsevier Science B.V. All rights reserved.